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While the logistics real estate market finished 2010 on a strong note, various factors—such as high oil and gas prices, debt issues in the U.S. and abroad, the earthquake and tsunami in Japan contributed to the very real possibility that the first half of 2011 would not be as fortunate. Another factor was slow GDP growth, which was 1.28 percent and 0.36 percent, respectively, for the first and second quarters of 2011.

But that possibility was quelled somewhat based on data in a new report from commercial real estate firm Grubb & Ellis, entitled “Logistics Market Trends United States First Half 2011.”

According to the report, the U.S. logistics market had 32.7 million square feet absorbed, which Grubb & Ellis pointed out is a level that has not been reached since 2007. Of that 32.7 million square feet, it was more heavily weighted towards the second quarter, which had a quarterly net absorption of 18.1 million square feet.

And of the 28 markets tracked by Grubb & Ellis, 21 had positive demand and ten saw an increase in total vacant square feet. The report noted that the top six U.S. logistics markets—Inland Empire at 11.2 million square feet; Dallas at 4.5 million square feet; Atlanta at 4.0 million square feet; Chicago at 2.6 million square feet, Northern New Jersey at 2.6 million square feet; and Central Pennsylvania at 2.2 million square feet—represent 85 percent to the total net absorption in the market.

“It is key to realize that national market numbers are only an average, whereas individual markets are different and often tell a story that differs from what is happening on a national basis,” said Tim Feemster, Grubb & Ellis Sr. Vice President, Director Global Logistics.

The report also explained that new supply for logistics space is still “extremely constrained,” with 5.4 million square feet of completions over the first half of the year and 10 logistics buildings completed in during that period.

Another factor behind the low number of completions of that many shippers and logistics services providers are focused on cost-cutting and supply chain reconfigurations, according to Rene Circ, Grubb & Ellis Vice President, National Director of Research, Industrial. And Circ and Feemster both said that as business levels drop, inventory levels tend to rise, which can force shippers to occupy more space.

Looking at Class A logistics space, Circ said it has never seen even one quarter of negative demand during the peak of the Great Recession in 2009, even when every other sector went through negative absorption.

“As supply chains get reconfigured and companies move from one mode to multiple modes sometimes they actually need to add space to make their supply chains more efficient,” said Circ.

He said this is especially relevant in areas which rely on containerized import and export activity like the Inland Empire in Southern California, which currently account for about 25 percent of total logistics market demand, due to the ports of Los Angeles and Long Beach.

The national vacancy rate, which Grubb & Ellis considers the best measure of the market, declined from 12.8 percent in the second half of 2010 to 11.8 in the first half of 2011. This is down 200 basis points from the peak during the fourth quarter of 2009.

“This rate of decline is very positive,” said Circ. “A huge component of it is the lack of speculative new construction and the rate at which that is declining is unprecedented. The vacancy rate is still elevated. The rate for Class A logistics buildings tends not to go below ten percent. There is a propensity to keep adding to the base, as opposed to adding to vacancy, because in good times most buildings being built are speculative and not built to suit. That said it is very hard for logistics spaces to be meaningfully below ten percent…which is usually the rule of thumb in terms of who has pricing power as it varies by market.”

According to the report, third-party logistics (3PL) service providers comprised the most active segment of the market over the first half of 2011, with retailers gaining more traction in the section quarter. Class A, Class B, and Class C vacancy rates are at roughly 17.4 percent, 11.7 percent, and 11.1 percent, respectively. 3PL tenants, said Grubb & Ellis, target modern Class A logistics buildings that have the most rapid vacancy rate. And the firm said that large, modern blocks of space are becoming scarce in the U.S., which could lead to increased new deliveries in 2012.

Grubb & Ellis expects new completions to rise during the second half of 2011, explaining that there is currently more than 7 million square feet of logistics space in the U.S. that is currently under construction, coupled with 3.7 million square feet under construction that is expected to be completed in 2012.

About the Author

Jeff BermanGroup News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).

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